Bill Gates offered a revolutionary observation on Wednesday in Manhattan, during a discussion on philanthropy at the 92nd Street Y lecture hall. Wall Street pay, he said, is "often too high."
Gates's wisdom on Wall Street's compensation problem seems obvious enough, but his perspective on the theory is a little more inventive than most. The pay crisis, Gates says, is largely the result of a 1993 law that capped executive salaries: "It was a bad milestone in controlling executive salaries when that $1 million cap went on."
This viewpoint argues that those salary limits encouraged business leaders to increase executive stock options, bonuses, and other payment methods that weren't restricted by the U.S. -- and that the very law designed to control CEO salaries actually sent them soaring.
There's something to be said for that. The 1993 law basically gave a huge cadre of math whizzes an incentive to get creative with compensation packages, and let the chips fall where they may. Still, there's a central flaw to Gates's argument, in that it shifts responsibility for financial shenanigans from Wall Street malefactors to shortsighted Washington bureaucrats -- claiming that it was Congress's failure to account for the psychology of greed that enabled Wall Street's ridiculous excesses.
It's a lot of fun to blame the cops for a crime, but there's another angle here that might make Gates less comfortable. The massive tax cuts of the last 40 years that funneled scads of money into Gates's pockets may have also laid the groundwork for Wall Street's massive money-grab. In the 1954 tax code, anyone making at least $200,000 -- $7.5 million today -- was taxed at a 91% rate, and corporations were taxed at 52%.
In 1964, the top individual rate was lowered to 70%, and further cuts over the next 40 years led to the current situation in which individual and corporate rates are both pegged at a meager 35%.
During this period, CEO wages have massively increased. In 1964, the average CEO made 24 times as much as his average employee; in 2007, that CEO made 275 times as much. While this jump owes a lot to factors including technological advances and outsourced industry, it's hard to ignore the influence of taxes.
CEOs in 1964 had a tax-based pay cap, after which the benefits of a big paycheck rapidly declined. Faced with paying a fortune in taxes, many companies apparently chose to reinvest their funds in lower-level employees, research and development, and other strategies for long-term growth. Over the past few years, however, greatly lowered tax rates have meant that executives -- and corporations -- get to keep a lot more money.
Given a choice between investing in their companies and investing in a house in the Hamptons, it's not hard to see why so many Wall Street tycoons have decided that big paychecks are the best place to put corporate profits.
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